Jon ShapleyThe Valero refinery in Port Arthur along with that of Motiva and Total can refine more than one million barrels of oil a day.
Valero is one of several Gulf Coast refineries impacted by sanctions on Venezuelan imports of crude.

U.S. refiners are eager to buy Canadian heavy crude to replace supplies they had been importing from Venezuela that are now blocked by Trump administration sanctions.

But there's not enough space on pipelines and trains to get it across the border.

TransCanada Corp.'s proposed Keystone XL pipeline could have been the answer. However it's no closer to being built than when President Donald Trump tried to jump-start it with a presidential memo signed in front of a crush of cameras on his fourth day in office.

“If the KXL pipeline was up and running, our Gulf Coast refiners would have all the Canadian heavy they need,” Stephen Brown, a refining industry lobbyist, said by email. “It's a totally avoidable situation.”

Trump is expected to highlight energy infrastructure in his State of the Union address, stressing the need for more pipelines and export terminals to harness the full potential of soaring American oil and gas production.

One of the most controversial energy infrastructure projects is Keystone XL, which TransCanada has been pitching since 2008 as a way to transport as much as 800,000 barrels a day to Gulf Coast refineries designed to process the heavy grade. Refiners say the pipeline is more needed than ever, following Trump's Jan. 28 decision to impose sanctions blocking U.S. transactions with Venezuela's state-owned oil company, Petroleos de Venezuela SA.

The thick, tar-like bitumen extracted in Alberta, Canada is an ideal replacement for the roughly 500,000 barrels of heavy crude the U.S. had been importing daily from Venezuela. But Canada is already sending the U.S. a record supply of its crude -- some 4 million barrels per day last month. And there isn't enough pipeline capacity to send more, BloombergNEF analysts said in a Feb. 4 research note.

Despite efforts to boost rail transports of crude to the U.S., the Alberta government was so worried about the bottlenecks -- and the resulting sinking prices for Canadian crude -- that they mandated oil production cuts last fall.

The issue came up during a Jan. 30 call between U.S. Energy Secretary Rick Perry and his counterpart in Canada, Natural Resources Minister Amarjeet Sohi.

“We had a broad discussion on overall market access and how both countries can actually work together,” Sohi said, adding that one topic was was the need for pipelines. “We talked about the challenges we are facing in both countries,” including “in relation to Keystone.”

Alberta's decision to curtail oil production buys time for new pipelines to begin operating, including Enbridge Inc.'s expanded Line 3, expected to add some 370,000 barrels per day of additional capacity as soon as the fourth quarter. Regulatory snags and lawsuits make it hard to predict the timing of the Canadian government's Trans Mountain pipeline expansion, which would add 590,000 barrels of capacity, much less the long-delayed Keystone XL project.

TransCanada already built Keystone XL's southern leg, which since 2014 has sent crude from Cushing, Oklahoma, to Nederland, Texas.

Trump vowed to help Keystone XL while campaigning for president and moved to make good on that promise immediately after he was sworn in, by effectively reversing former President Barack Obama's 2015 decision to reject the pipeline on environmental grounds. On Trump's fourth full day in office, he issued a memo inviting TransCanada to reapply for a required presidential permit for the project and directing the State Department to swiftly rule on the proposal. The Calgary-based company complied, and Trump's State Department authorized Keystone XL in March 2017.

Nearly two years later, the pipeline is still mired in the same legal and environmental disputes that helped stall the project for seven years under Obama, illustrating the limits of Trump's presidential power. Oil industry leaders and Keystone XL advocates who have cheered Trump's efforts to revive the pipeline blame environmental activism for continued delays.

The project suffered a major setback in November, when a U.S. district judge in Montana faulted the State Department's reliance on a 2014 environmental impact assessment in authorizing Keystone XL. U.S. District Judge Brian Morris said the underlying environmental study is inadequate and needs to redone, this time factoring in oil prices, greenhouse gas emissions and spill response strategies. The State Department is developing a new, supplemental environmental review, even as the Trump administration appeals the ruling.

Nebraska Battle

Another legal battle has ensnared the pipeline in Nebraska, where the state supreme court is considering a lawsuit from landowners challenging the Public Service Commission's decision to approve a route for the project. TransCanada has said it expects that case to be resolved in early 2019.

All of those legal challenges will likely have to be cleared before TransCanada even officially decides to build the project. The company hasn't made a final investment decision, though TransCanada officials have repeatedly said they remain committed to constructing Keystone.

“We have said for years that Keystone XL will supply the U.S. Gulf Coast with a stable, secure supply of crude oil from a reliable trading partner, reduce reliance on OPEC and create thousands of well-paying, family-supporting jobs for American laborers,” TransCanada spokesman Matthew John said by email. “That remains true today.”

Keystone XL critics say the project would exacerbate climate change by driving production of carbon-intensive Canadian crude and raise oil spill hazards along the pipeline's 1,200-mile route through six states. Opposition to the project is fierce; when Trump addresses Congress and the nation Tuesday night, one of the pipeline's chief opponents, environmentalist Bill McKibben, will be watching from inside the Capitol, having been invited as a guest of Maryland Democratic Congressman Jamie Raskin.

Although the U.S. is awash in oil, the light variety flowing out of the nation's shale today is not the right kind for Gulf Coast refiners that have optimized their facilities to run generally cheaper, heavy crudes coming from Canada, Mexico and Venezuela. Even though just 6 percent of U.S. oil had been coming from Venezuela before Trump's sanctions, the country had been supplying about 38 percent of U.S. heavy crude needs, according to BNEF.

“It would certainly be to the advantage of the U.S. and our best trading partner -- Canada -- for us to be able to replace that Venezuelan heavy crude with With Canadian heavy crude,” Sommers said. “Keystone is still wrapped up in courts and a real consequence of that is we're not able to get crude oil out of Canada.”

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